Risky IPO seeks new way to trade star athletes

In this Tuesday, Feb. 4, 2014, photo, Fantex CEO Buck French works on a laptop during promotional stop in San Francisco. Professional athletes frequently get traded to other teams, but San Francisco 49ers tight end Vernon Davis is about to be the first one to be traded as part of an IPO. Davis, an eight-year veteran of the National Football League, is serving as the litmus test for a risky concept hatched by Fantex Inc. The San Francisco company is trying to turn sports stars into commodities whose moneymaking potential can be bought and sold on an exchange run by Fantex.

SAN FRANCISCO — Professional athletes frequently get traded to other teams, but San Francisco 49ers tight end Vernon Davis is about to be the first ever to be traded like a stock.

Davis, an eight-year veteran of the National Football League, is serving as the litmus test for a risky concept: Whether sports stars should be treated like public companies, whose moneymaking potential can be bought and sold on an exchange by ordinary investors. San Francisco-based Fantex Inc. plans to operate the exchange and will orchestrate Davis' initial public offering of stock after getting regulatory approval from the Securities and Exchange Commission.

The deal requires Fantex to pay Davis $4 million in exchange for 10 percent of his future earnings, including some of his off-field income. To cover Davis' fee, Fantex seeks to sell 421,100 shares of stock at $10 apiece. The company hopes to complete the initial public offering in the next few weeks.

Davis, 30, will need to make more than $40 million just to deliver a small return on Fantex's investment in him.

Fantex is counting on him to earn most of that money after his current contract with the 49ers expires in 2015. By then, Davis will be at an age when it might be difficult for him to land another big payday, although there are precedents for it. That means the deal could prove to be more profitable for Davis than the investors who buy the Fantex stock tracking his performance.

IPO expert Francis Gaskins is advising investors to stay on the sidelines. Fantex's concept "just sounds like something that P.T. Barnum would try to sell," says Gaskins, president of IPOdesktop.com. "I don't think it's going to work out."

Fantex CEO Buck French has been trying to overcome skepticism while traveling around the country for pre-IPO meetings that began in early February. The journey included traveling to 12 cities in two weeks last month on an old bus that retired NFL announcer John Madden used to ride to get to his broadcasting assignments.

"We are successful businessman and we are putting together a transaction we believe in," French says.

Fantex will cover its expenses by taking a small cut of the revenue generated by Davis. Investors who own the Davis tracking stock could profit from a combination of the player's earnings and gains in the value of their shares.

The income will come from Davis' career football earnings dating back to last October, as well as any money he makes from off-the-field endorsements or other jobs, such as sports broadcasting, that he gets during the rest of his life.

The deal only covers earnings tied to his success as an athlete. If Davis decides to do something like sell insurance after his playing days are over, Fantex won't receive any of that money. His income from his holdings in a Jamba Juice franchise and a San Jose, Calif. art gallery is already excluded.

The NFL itself has become a huge business that has created more opportunities for its star players to get rich.

The league's annual revenue now hovers around $10 billion, up from about $4 billion 14 years ago. Commissioner Roger Goodell has set a goal of reaching $25 billion by 2027. Most of the money is coming from TV networks that are willing to pay steadily higher fees to attract large audiences that watch games live instead of on DVRs later — a major draw for advertisers.

Major League Baseball, with annual revenue estimated at about $8 billion, and the National Basketball Association, with estimated annual revenue of about $5 billion, also are thriving.

As the stakes in sports are rising, so is the money paid to athletes. Forbes magazine's 2013 list of the world's 100 top-paid professional athletes required a minimum annual income of $16 million. New Orleans Saints quarterback Drew Brees, with $51 million in annual income, led the 13 NFL players who made the Forbes list.

Fantex is focusing on players in a lower-income bracket. Besides Davis, the company also has lined up IPOs tied to Houston Texans running back Arian Foster and Buffalo Bills quarterback EJ Manuel. None of them have a contract that will pay more than $6.5 million next year. Fantex hopes to eventually sign similar IPO deals with other athletes outside of football.

Athletes who sign deals with Fantex get a guaranteed payment upfront and promises of help managing their personal brands for years to come. Some of the guidance may be provided by NFL Hall of Fame quarterback John Elway, a director on Fantex's holding company, and retired golf star Jack Nicklaus, who is a Fantex adviser.

Davis isn't discussing his reasons for participating in the IPO yet because of securities regulations discouraging public comments that could sway investors considering whether to buy newly issued stock. He is normally outspoken and has a wide range of interests outside football. Besides his art gallery and Jamba Juice franchise, Davis is such a big fan of curling that he served as honorary captain of the USA's team during last month's Winter Olympics.

NFL spokesman Brian McCarthy declined to comment on the IPO.

French, Fantex's CEO, is a long-time entrepreneur who scored his biggest windfall 14 years ago when he sold one of his previous companies, OnLink Technologies, to software maker Siebel Systems for $760 million. He came up with the idea for Fantex two years ago with another former Silicon Valley venture capitalist, David Beirne, and Dave Mullin, who had been a chief financial officer at several other companies and is now filling the same role at Fantex.

The trio funneled their interests in sports, finance and management into Fantex in hopes that the idea will appeal to kindred spirits.

Fantex is piggybacking on the increasing popularity of fantasy sports —a popular pastime that involves people forming leagues that revolve around the statistics of real athletes. Each fantasy participant drafts players to fill different positions. They score points based on how well their players do in real life. At the end of the season, the winner of the fantasy league wins a prize, usually a financial jackpot consisting of the entry fees.

An estimated 33.5 million people in the U.S. participated in at least one fantasy sports league last year, according to the Fantasy Sports Trade Association. The money spent on the fantasy games totaled about $3.7 billion, or an average of $111 per person, the group estimated. Football is, by far, the most popular sport for fantasy leagues.

The performance of the stock tracking Davis' career will likely hinge on whether the tight end lands another big contract after his current deal with the 49ers expires in 2015. He could end up making nearly $10.3 million, including bonuses, during the next two seasons, according to Fantex's IPO documents.

None of that money is guaranteed, highlighting the pitfalls of betting on the ephemeral careers of athletes. Injuries are a hazard in all sports, but they are more severe and frequent amid football's jarring collisions.

The average NFL career lasts just three years, although standouts usually play a lot longer.

The NFL's perils already ruined Fantex's original game plan. The company set out to test its concept last October with an IPO selling a stock Foster, a top running back for the Houston Texans. The IPO was indefinitely postponed in November after Foster got hurt and underwent season-ending surgery on his back.

Davis has never had to sit out an entire season, though he has missed some games because of various injuries, including a strained hamstring and a concussion last year. After analyzing the longevity of 212 other tight ends from 1990 through 2010, Fantex concluded Davis should be able to play for nearly 14 years.

Davis ranks among the NFL's top tight ends, although he isn't widely considered to be the best player at his position. He has never been selected as a starter on the NFL's annual All-Pro team, a distinction meant to highlight the best players at each position.

But Davis has been winning more acclaim as his career progresses. He made the second team in last year's All-Pro voting after catching a career-best 13 touchdown passes last season. Before the 49ers lost their conference championship game, Davis caught his seventh career touchdown in the playoffs to tie an NFL record for tight ends.

Fantex's projections for Davis call for his next NFL contract to be worth at least $33 million. French believes that goal is within reach, based on the deals that two other star tight ends Tony Gonzalez and Antonio Gates — two players who were voted as first-team All-Pros during their careers.

The IPO documents also paint a rosy picture of Davis as a pitchman. Fantex estimates his endorsement income during the remainder of his career could approach $9 million, even though he only has deals totaling $413,000 during the next two seasons, according to the IPO filing.

Davis could be making slightly more if he had not been fired last October as a spokesman for a coconut water called Vita Coco after he tweeted an endorsement of a competing product.